Distribuidora Internacional de Alimentación (DIA), the Spanish discount chain, issued a major profit warning on 15 October, which prompted S&P and Moody’s to downgrade the company by several notches from IG to BB-/Ba2. In the wake of the profit warning, bonds sold off 30-45 points and the stock price fell over 40% on 15 October, with the YTD decline now over 80%. DIA is facing a liquidity crunch, while there is also a possibility of a covenant breach at end-FY18. There has been substantial management turnover, with the CEO, CFO and chairman all replaced in recent months. The company has initiated a strategic review, and is expected to release more information next week (30 October), when it releases 3Q18 results. We view DIA’s problems as partly external (competitive pressures, FX) and partly self-inflicted (overly aggressive financial policy). We believe that as long as the company is able to restore confidence in the immediate term, produces a credible turnaround plan and strengthens liquidity, it should be able to continue to service its debt and keep the capital structure more or less intact. Conversely, if DIA’s problems turn out to run deeper or the company fails to reassure investors, there may be more downside, and a more comprehensive restructuring may be required given the short-term maturities and potential for an imminent covenant breach.